Cannabis Musings - August 31, 2023
Because you haven't yet read enough about rescheduling.
Friends. Sometimes, you’re at the right place at the right time. In case you were asleep yesterday, you missed the news that the Department of Health and Human Services has recommended to the Drug Enforcement Administration that cannabis be rescheduled to a Schedule 3 controlled substance. This is merely the first step in a process, but wow, no one expected this report to be issued in the summer doldrums. And yet, here we are.
If the DEA does indeed choose to reschedule cannabis to Schedule 3, the definite changes would be plant-touching companies would no longer be subject to IRS Code Section 280E (meaning they’d be able to fully take deductions), restrictions on cannabis research would change, and overall sentiment would skyrocket (consider what happened to cannabis stock prices based on the HHS news alone). It would be an immediate and dramatic economic benefit to operators.
And yet, there’s still plenty of uncertainly and confusion about all of this. So, I thought I’d take a quick moment to run through some of the actual questions, perspectives, and speculation I’ve gotten and seen over the past 24 hours on the topic. There’s a lot of underinformed shmoozing out there about rescheduling (granted, I don’t profess to be an expert on this either, which is why none of this is legal advice).
So, cannabis is now legal, right? No.
What happens next? Shane Pennington did a nice job of laying out the process in the August 11 Cannabis Musings. In short, the DEA needs to run through its statutory process, which includes a public comment period.
When will the DEA announce its decision? Who knows. Given the HHS report was expected by just about everyone in mid-December, it’s not even worth guessing at this point.
What could stop this? Politics. In particular, the problem that rescheduling would violate the terms of the Single Convention, an international treaty on drug trafficking, is still very much live. Granted, the fact that some states legalized cannabis means that the U.S. is already in violation of the treaty, and nothing happened under the treaty when Canada legalized, but it’s hard to estimate the U.S. government’s concern about this.
Is this all because Biden wants to pander to voters ahead of the 2024 election? Maybe? Does the industry care?
If cannabis is state-legal, and the federal government says it wouldn’t take action against Schedule 3 cannabis operations, that means it’s legal, right? No. That’s not how criminal law works.
Would this open up banking/stock exchanges to cannabis? No. Cannabis would still be a Schedule 3 controlled substance, so all of the industry’s operations would still be illegal, meaning the legal issues surrounding banking and finance would remain.
Isn’t this just a bailout for the cannabis industry? Well, it would allow every plant-touching company to keep more of its money by allowing it to pay the same taxes as everyone else. So, yeah, in a way, I guess it kind of is.
Won’t this result in pharmaceutical companies taking over the cannabis marketplace because the industry will bifurcate? I don’t think so. This is based on Shane’s comment that he wouldn’t expect the DEA to establish any sort of licensing scheme for Schedule 3 cannabis, as well as his and Howard Sklamberg’s comments on the podcast that, if rescheduling happens, nothing would really change other than 280E and research. Of course, only the DEA knows what it's thinking, but it seems to be highly unlikely that the DEA would establish a regulatory/licensing scheme to allow for the licensed manufacture and dispensing of Schedule 3 cannabis.
Also, I’ve been of the opinion for a long time that pharmaceutical companies are simply not interested in cannabis (as opposed to tobacco and alcohol companies), because there’s no clear path towards pharmaceutical drug exclusivity (a process that’s incredibly expensive) that wouldn’t otherwise compete with all of the other cannabis that’s available (both state-licensed and unlicensed). To me, that’s why their focus is more on the psychedelics space.
Is this just the first step towards descheduling? Highly unlikely.
How does this affect interstate commerce? It doesn’t, although rescheduling would certainly improve sentiment across the board, so maybe it helps alleviate the concerns of state regulators as they reconsider their own state laws prohibiting interstate transport of cannabis.
If this happens, does it possibly spur Congress to move ahead on legalization so that the Treasury may recoup some of its losses from 280E no longer applying by imposing an excise tax on cannabis products? (this is my question.). According to one report, 280E’s impact in 2022 amounted to $1.8bn in additional taxes paid, against $476bn of business income taxes and $4.9tn total taxes collected in 2022. Is that enough to persuade certain members of Congress to bravely look past the sentiment of their primary election voter base and risk political capital by supporting legalization, allowing the IRS to capture more delicious money from cannabis sales? Zei nit a nar! (“Don’t be a fool!”) - logic doesn’t apply to federal cannabis policy.
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Hauser Advisory provides advice and strategy on business lifecycle events and cannabis industry navigation, tapping into a deep, national network and twenty-five years of dealmaking and capital markets experience.
© 2023 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form.